Crowdfunding vs. Peer-to-Peer Funding

Person calculating donations: crowd funding vs peer-to-peer funding

It is no secret that fundraising is a key part of political action. At $14.4 billion, Open Secrets reports that the 2020 general election was the most expensive in U.S. history. Campaigns and political groups that cannot effectively identify donors and raise funds are at a huge disadvantage. There are more fundraising tools available than ever before—but campaigns need to know how to use them.

At Aristotle, we provide data-driven campaign management services to election campaigns, political action committees (PACs), and grassroots political advocacy organizations. With deep experience, our team understands the importance of fundraising. In this article, you will find a comprehensive guide to the key things to know about crowdfunding and peer-to-peer funding.

An Overview of Crowdfunding and Peer-to-Peer Funding

Fundraising is changing—not just in politics, but also for charities, businesses, and start-up companies. Crowdfunding and peer-to-peer (P2P) funding/lending have opened up new opportunities. While you may sometimes hear the terms ‘crowdfunding’ and ‘peer-to-peer funding’ used interchangeably, that is a mistake. The terms actually refer to two separate things:

  • Crowdfunding: As broadly defined by Investopedia, crowdfunding is the process of raising “small amounts of capital from a large number of individuals.” Crowdfunding often, but not always, is driven by the internet/social media. There are actually several different types of crowdfunding, including reward-based, donation-based, and equity-based. With reward crowdfunding, the participant (person who provides funding) will get some sort of reward. For example, a start-up company may give early access to a product. With donation crowdfunding, the contribution is purely a donation and nothing is expected in return. For example, someone may choose to give a small amount to a local political campaign. With equity crowdfunding, the person (or entity) that provides funding receives some sort of equity in the company. There are certain regulations for all types of crowdfunding.
  • Peer-to-Peer Funding: Also referred to as peer-to-peer lending or P2P lending, peer-to-peer funding is technically a different model than the types of crowdfunding that were discussed above. The Corporate Finance Institute (CFI) describes peer-to-peer lending as a type of “direct lending of money to individuals or businesses without an official financial institution participating as an intermediary in the deal.” In other words, P2P lending/funding involves a loan. The key difference with traditional lending is that the lender is a “peer”—either an individual or business—that is not a bank or other financial institution.

Understanding the Differences

The principal difference between crowdfunding and peer-to-peer lending is that crowdfunding does not involve a loan. Crowdfunding may be a straightforward donation for which no future remuneration is expected. Alternatively, crowdfunding could be offered in exchange for equity in the company. There are SEC regulations in place for equity-based crowdfunding. It is a potential option for certain types of start-up companies. Equity does not guarantee “repayment.” The value of the equity will depend on the future success of the company/organization.

In contrast, peer-to-peer lending involves a loan. It is a non-traditional loan, but it is still a loan and repayment is expected to be consistent with the terms of the agreement. Even if the “project” which has been funded fails, that does not absolve the P2P funding recipient from its obligation to repay.

The Internet as a Powerful Tool

There’s no denying that your online presence is a powerful tool, but keep in mind that campaigns need to follow the law. There are rules and regulations in place for both crowdfunding and peer-to-peer lending. Indeed, equity crowdfunding is subject to federal securities law and P2P lending is governed by a number of different state and federal regulations. Notably, political campaigns and political advocacy groups are subject to additional regulations.

Campaigns can absolutely raise money through the internet and social media using crowdfunding strategies, but they must comply with election fundraising  rules. As explained by the Federal Election Commission (FEC), campaigns that raise funds from the internet should ensure that the proper disclaimers are provided and that contribution limits are followed.

The FEC also has regulations in place regarding campaign debt. Indeed, there are very strict rules and requirements in place for campaigns that take on debt. Any campaign or political advocacy group considering a debt-based strategy for raising funds needs to speak with the right legal professional to ensure full compliance with the law.

Get More Out of Donors With the Right Tools

The reality is that campaigns and political organizations need funding to keep the lights. An underfunded campaign is in a difficult position. It may fail to reach its goals. Aristotle provides resources to help clients better develop strategies, find donors, and raise more money. We offer a number of different tools to help electoral campaigns, PACs, and grassroots advocacy groups raise funds more effectively, including:

  • Aristotle Donor Insight: Aristotle Donor Insight is a comprehensive political contribution database analysis tool. We are prepared to collect data, analyze data, and generate an actionable report that your campaign or organization can use to better raise more money from donors. With enhanced message targeting, a better understanding of what drives your donors, and knowledge about the realistic contribution potential, you will know what to ask for.
  • Aristotle MatchIT: Aristotle MatchIT helps to utilize the data that you already have. We combine your data with our data to improve your targeting and put you in the best position to raise funds, whether through a small donor crowdfunding campaign or a strategic approach to find large donors. The process is simple. You can create a free account, upload your data list, choose your data services, and download a more comprehensive and useful data list.

Achieve Your Fundraising Goals with Aristotle

At Aristotle, we have worked with political campaigns and political advocacy organizations for nearly 40 years. Throughout that time, we have consistently been leaders in the industry. Our team also stays ahead of the competition on the latest trends, including in political data and political contributions. To learn more about how we can help you, please contact us today.

 


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